ADCORE: Interim Report January – September 2001
Restructuring and cost rationalisation
Adcore’s extensive restructuring was completed in summer 2001. All enterprises/units outside Stockholm have been divested or liquidated: a total of 24 enterprises in 11 countries with some 1,200 staff. All remaining restructuring costs have been posted to the accounts in the third quarter. A cost rationalisation programme, whose objective is to cut costs by SEK 100 m from year-end 2001, is proceeding according to plan. New organisational structure, based on competencies, implemented.
A focused Adcore
Subsequent to the change implemented, Adcore is a corporation focused on IT and management consulting services with a broad and secure base in Stockholm. Subsequent to its current rationalisation, the corporation will have some 600 staff at year-end 2001. A new, skills-based organisational structure has been implemented. Despite a problematic market and extensive media publicity, Adcore has continued to secure new assignments. Its five largest clients in January-September were Ericsson, SEB, Telia, SAS and the Confederation of Swedish Enterprise.
New issue consummated
After considering various options, Adcore effected a private placement in October against a background of weak profitability the prevailing liquidity situation and the necessity of restructuring. This issue restored the requisite liquidity and raised SEK 93 m net.
Profit level improves slightly but remains unsatisfactory
During the period, Adcore pro forma generated an operating loss (before goodwill amortisation and restructuring costs) of SEK -91 m on sales of SEK 516 m, with the corresponding figures for the third quarter being SEK -36 m and SEK 132 m, implying quarter-on-quarter profit gains of SEK 5 m, or 12%. Adcore’s billing rate improved slightly.
Market conditions hard to assess
Client hesitancy remains a feature of market conditions, and given general economic concerns and excess capacity on the consulting market, the position is hard to assess, but does not justify hopes of imminent improvement.
This Report uses the expressions ‘Adcore pro forma’ and ‘liquidated units’. The former is the new Adcore, while ‘liquidated units’ encompasses all those units in Sweden and foreign countries that have been liquidated, and that are wholly or partly consolidated in Adcore’s statutory accounts. Selected key figures for ‘Adcore pro forma’ are published on the final page of this report.
Change in the Adcore group-restructuring and cost rationalisation complete
Adcore has undergone extensive restructuring through 2001. From being active in 13 countries with staff approaching 2,000, the corporation now has some 600 staff based in Stockholm, Sweden. The primary background to these dramatic developments is that after extreme expansion in 2000, Adcore encountered acute profitability and liquidity problems when its market weakened in early 2001. This, in combination with an excessively complex structure, resulted in the situation threatening Adcore’s existence.
Accordingly, 24 enterprises and units have been divested or liquidated over the last two quarters. In total, operations in 11 countries and several enterprises in Sweden, with staff of 1,200, were liquidated in a relatively short period. During the three quarters, these operations generated total sales of SEK 410 m, with an operating loss of SEK 102 m in the same period.
The Stockholm operation has also been rationalised, with organisational resources focused, and headcount cut from approximately 700 to some 600, about 40 of which are in administrative functions. The cost rationalisation programme initiated after summer 2001, whose objective is to save SEK 100 m annualised from year-end 2001 onwards, is proceeding according to plan. As a consequence of this restructuring and cost rationalisation, the first phase of Adcore’s realignment is complete. The liquidation generated write-downs, primarily of goodwill, and restructuring costs, totalling SEK 1,890 m in the period.
The next phase is to develop Adcore into a profitable corporation in organic growth, focused on creating value for clients and shareholders. Greater intensity and enhanced quality in the sales process is intended to ensure the market being serviced effectively. Adcore’s repeat purchase frequency remains high; a focus on high-quality working methods in close contact with customers is intended to assure this remains the case in the future.
Adcore has completed a rigorous cost-cutting process, particularly within administration, premises and overheads, although Adcore’s consultant corps has also been downsized. Measures have been implemented to assure the maintenance of this reduced cost level, and that it is progressively adapted to respond to any potential further deterioration of market conditions.
Coincident with the completion of restructuring, Adcore’s COO Sten Wranne will assume responsibility for accounting, finance and IT.
Adcore’s weak profitability, liquidity situation and the necessity of restructuring provided a backdrop to its need for a capital injection in order to survive.
Therefore, on 12 September 2001, Adcore’s Board resolved to propose a new issue with preferential rights for shareholders to an Extraordinary General Meeting. But during efforts to construct the necessary guarantee consortium, it became apparent that this would prove fruitless, because too few shareholders were prepared to participate in such a consortium, or undertake to underwrite their share of a preferential rights issue. This response, and adverse events on the stock market and surrounding world, precluded the consummation of a preferential rights issue.
In parallel with this process, Adcore also considered the option of divesting significant elements of the corporation to a new owner. This process attracted three concrete bids, although the Board considered that they were at too low a level to be practicable.
With the above considerations, an Extraordinary General Meeting on 27 September consequently resolved to authorise the Board to decide on a private placement instead of the originally proposed preferential rights issue. On 3 October, the Board resolved to effect a new issue targeted primarily at IT Provider, Skandia, the Third AP (National Pension Insurance) Fund, Länsförsäkringar and Tanglin fond, as well as a consortium led by Christer Jacobsson and Anders Swensson. This issue was effected at a share price of SEK 0.40, and raised SEK 169.5 m gross for Adcore. After re-payment and set-offs of previous funding, the issue raised SEK 93 m in cash in mid-October. The issue was registered on 19 October. More information is available in the ‘ownership structure’ section below.
Minority shares in the former Connecta AB have been the subject of a compulsory redemption process since June 2000, encompassing nearly 200,000 shares, or just over 1% of all shares in the former Connecta AB. In this process, considered long term, Adcore has taken steps to minimise any potential liquidity impact.
Strategy and organisational structure
Adcore offers assistance to corporations and non-profit organisations by applying a combination of information technology, methodologies and business know-how to enhance productivity, cut costs and develop new business.
Adcore’s organisational resources are built on competency with two divisions, IT and Management. The primary competencies are:
– Strategy consultants:
– Building new business;
– Building business case;
– Sector know-how.
– ERP systems (SAP, Movex, Intershop et al.);
– Legacy systems;
– Web development (Java, WebSphere);
– Infrastructure (network design, security et al.).
– Communication professionals
– Interaction designers;
– Graphic designers;
– Interface programmers.
– Change consultants
– Change management;
– Business and process development.
Market and outlook
Keeping pace with the cyclical slowdown and general uncertainties, the downturn apparent in the market for most of the year continued in the third quarter. Clients remain hesitant; the decision process ahead of major projects is particularly protracted. However, the market always offers smaller-scale development and enhancement projects, but overall, greater intensity in the sales process is necessary to protect Adcore’s market position. Demand in the Stockholm region remains greater than other parts of the country, and generally, the Swedish consulting market is subject to excess capacity, which combined with reduced demand, is eliciting price pressure, exerting an adverse influence on utilisation. Progress over the forthcoming months is hard to assess, but at present, there is nothing to suggest any imminent improvement in market conditions.
Clients (Adcore pro forma)
Despite the problematic market and extensive media coverage, Adcore has continued to win new assignments, with new clients, or existing clients embarking on new projects with Adcore in the last quarter including Cramo, ICA, Vin & Sprit, OM and Ericsson. Adcore has also signed a master agreement with ATG.
At the end of the period, the order backlog was SEK 107 m, approximately equivalent to two months’ sales.
During the first nine months of 2000, Adcore’s five largest clients were Ericsson, SEB, Telia, SAS and the Confederation of Swedish Enterprise, which represented an aggregate total of 57% of Adcore’s sales.
Sales and profit performance
Adcore pro forma (remaining operations)
Net sales for the January – September period amounted to SEK 516 m, down 3.3% year-on-year.
Profit before restructuring costs and goodwill amortisation, as well as group-wide items, was SEK -11.5 (103) m. Including group-wide items, Adcore generated a profit of SEK -91 (72) m; the billing rate in the period was approximately 65%, and has improved slightly during the third quarter.
In the third quarter, sales were SEK 132 m; profit before restructuring costs and goodwill amortisation was SEK -35.6 m, a quarter-on-quarter profit gain of SEK 4.7 m.
Adcore pro forma’s average billing per consultant over 12 months was SEK 1,377,000 an increase of nearly 7% on the full year 2000.
The group (including divested/liquidated units)
Sales for the period were SEK 925 m, up 5.5% on the corresponding period of 2000. The sales gains were due to a number of acquired enterprises being consolidated for a longer proportion of the period in 2001 than in 2000.
Operating profit before goodwill amortisation and restructuring costs fell by SEK 279 m to SEK -193 (86) m. Apart from the restructuring costs indicated below, earnings have suffered a general adverse influence from a weaker market, the ensuing lower billing rate and high overheads.
The nine-month profit figure includes restructuring and liquidation costs, plus write-downs, totalling SEK 1,890 m. Adcore has made further provisions to encompass those costs arising coincident with the liquidation of all units outside Stockholm in this period’s accounts. When provisioning in previous quarters in 2001, Adcore assumed that it would be retaining operations in other locations in Sweden. However, the focus on Stockholm, and those rationalisations undertaken in the Stockholm operation, have implied further restructuring costs, which have now been posted in their entirety.
Adcore’s minority holding in Adcore Japan will also be liquidated; the associated costs have been posted.
The group’s net financial position for the period was SEK 2 (10) m; profit before tax was SEK -2,128 (-114) m.
Cash flow and financial position
Cash flow from operations was SEK -228 (58) m for January – September. The third-quarter operating cash flow was SEK -44.7 m, up SEK 78.5 m quarter on quarter.
Total net investments in the period were SEK 206 m, including a final payment of SEK 144 m for corporate acquisitions, funded through non-cash issues amounting to a total of SEK 68 m and cash of the SEK 139 m. Third-quarter net investments were SEK 65 m.
The closing balance of consolidated goodwill was SEK 29 (2,231) m, a SEK 1,226 m net reduction since 1 January. Goodwill was written down by a total of SEK 1,299 m in the period, with SEK 23 m in the third quarter.
The Balance Sheet includes deferred tax of SEK 269 m, calculated on the basis of a 28% tax rate.
The closing balance of liquid funds was SEK 10 m, down SEK 192 m since the previous year-end. The aforementioned private placement, raising SEK 93 m cash for the corporation, was effected after the end of the reporting period. Subsequent to this transaction, liquid funds amount to SEK 103 m.
After consummation of the private placement, Adcore’s equity ratio is approximately 25% before goodwill, and 21% after goodwill.
Adcore’s employee headcount was 856 at the end of the period, 705 of which are employed by Adcore pro forma; after current rationalisation, staffing will be some 600. The average number of employees in the period was 1,612 (1,163). Since 1 January, the employee headcount has reduced by some 1,200 through divestments and liquidation.
Ownership structure and share price performance
As of 28 September, Adcore had 34,620 shareholders. The five largest shareholders subsequent to the new issue registered on 19 October, and share acquisitions by Ole Oftedal, Adcore’s CEO, and a number of other senior executives are illustrated in the following table. Subsequent to these transactions, the Board and management owns some 17% of all shares; additionally, an extended group of senior executives have acquired stock options corresponding to 25 million shares. Including these options, the Board and management’s ownership increases to some 21%.
The number of shares at the end of the period was 151,922,226. After the new issue on 19 October, which increased the number of shares by 423,750,000, Adcore has a total of 575,672,226 shares. The full utilisation of existing options and convertibles programmes from the former Information Highway would add a further 1,313,243 shares. Another 18 million shares would be created by the full utilisation of the four existing warrants programmes launched subsequent to Adcore’s formation. Since the end of the reporting period, Adcore’s Board has decided to target a new incentive programme at all staff, which will be submitted to an Extraordinary General Meeting on 10 December 2001.
The Adcore share is quoted on OM Stockholm Exchange, Attract 40. The latest price paid on 6 November was SEK 0.62, implying that the share’s value has dropped by 97.8% since 1 January. Based on the number of shares subsequent to the new issue, the group’s market capitalisation was SEK 357 m on 6 November, against SEK 4,201 m as of 1 January, a reduction of 91.5%.
The parent company, with staff of 23, harbours the group’s support functions and group-wide development. Its net profit was SEK -79 m for the period January – September. After the completion of restructuring, the parent company will have four staff members.
The closing balance of liquid funds in the parent company was SEK 43.4 m, excluding funds raised from new issues.
Adcore’s accounting principles for the period were unchanged from the latest Annual Financial Statement.
Fourth quarter/Financial Statement 2001 14 February 2002
Stockholm, Sweden,7 November 2001
Chief Executive Officer
We have undertaken a summary review of this Interim Report in accordance with the recommendation issued by FAR. (the Swedish Institute of Authorised Public Accountants).
A summary review is significantly more limited than a full audit
Nothing has arisen to suggest that this Interim Report does not satisfy the stipulations of Swedish stock exchange and annual accounts legislation
The full Interim Report including tables is available to download from the enclosed link.